B&G Foods Inc (BGS) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the B&G Foods, Incorporated Third Quarter 2006 Earnings Conference Call. Today's call is being recorded.

[OPERATOR INSTRUCTIONS]

I would like to remind you that this conference call is being recorded. And now I would like to turn the call over to Mr. David Wenner, Chief Executive Officer of B&G Foods. Please go ahead, sir.

Thank you. Good afternoon everyone, welcome to the B&G Foods, third quarter 2006 conference call. Everyone on the call today can access detailed financial information on the quarter in our earnings press release issued today and available on our website at www.bgfoods.com. And in our quarterly report on Form 10-Q that we filed today with the SEC. Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements.

These statements are not guarantees of future performance, and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for more detailed discussions of the risks that could impact our future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise. We also will be making reference on today's call to certain non-GAAP terms like EBITDA and adjusted EBITDA. A reconciliation to GAAP terms is provided in today's press release, and is included in our quarterly report on Form 10-Q.

As usual, I'd like to start the call by asking our CFO, Bob Cantwell to discuss financial results for the quarter. After Bob's remarks, I'll discuss factors that influenced the quarter, some of our business highlights and some of our current thoughts concerning the business going forward. Bob?

Thank you, Dave. Net sales increased 9.5 million or 10.3% to 101.8 million for the quarter ended September 30, 2006, compared to 92.3 million for the quarter ended October 1, 2005. Net sales for the Ortega Food Service, dispensing pouch and dipping cup acquisition accounted for 3.2 million of the net sales increase. The Grandma's Molasses acquisition accounted for 2.5 million of the net sales increase and a temporary co-packing arrangement that is expected to remain in place for another three months accounted for 1.1 million of the net sales increase.

The remaining 2.7 million increase in net sales was related to increases in sales price and unit volume. Net sales of our lines of Maple Grove Farms, B&M, Ortega, excluding the dispensing pouch and dipping cup business, Las Palmas and accent products increased 4 million in total, offset by decreases in net sales of our Emeril's and Polaner products of 1.7 million. Net sales of all other brands increased in the aggregate by 0.4 million.

Gross profit increased 1.8 million for the third quarter of fiscal 2006 or 6.6% to 29.3 million, from 27.5 million in the third quarter of last year. Pro forma gross profit, which excludes our fiscal 2005 restructuring charge increased 1.5 million or 5.4% to 29.3 million for the third quarter, compared to 27.8 million in the third quarter of last year. Pro forma gross profit expressed as a percentage of net sales decreased 1.4% to 28.8% for the third quarter of fiscal 2006, from 30.2% for the third quarter last year.

The decrease in pro forma gross profit was primarily due to higher cost of packaging materials, transportation, maple syrup and corn sweetness during the third quarter, partially offset by sales price increases and a shift in the sales mix to higher margin products. Sales, marketing and distribution expenses increased 1.1 million or 10.6% to 11.5 million for the third quarter of fiscal 2006, compared 10.4 million for the third quarter of last year. This increase was primarily related to an increase in consumer marketing and in brokerage and sales commissions due to increased sales volume.

These expenses expressed as a percentage of net sales increased to 11.3% in the third quarter from 11.2% in the third quarter of last year. General and administrative expenses decreased 0.1 million or 6.1% to 1.6 million for the third quarter of fiscal 2006, compared to 1.7 million in the third quarter of last year. The decrease was primarily due to reduction for professional fees, offset by an increase in accrued incentive compensation.

The gain on sale of property, plant and equipment for the third quarter of fiscal 2006 relates to the gain on the sale of the company's New Iberia, Louisiana manufacturing facility of 0.5 million. There were no gains or losses on the sale of property, plant and equipment for the third quarter of last year. Amortization expense related to customer relationships, all of which relates to the amortization of customer relationship intangibles acquired in the Grandma's Molasses acquisition, was 0.2 million for the third quarter of fiscal 2005. We had no amortization expense of customer relationship intangibles for the third quarter of last year.

Operating income increased 7.4% to 16.6 million for the third quarter, from 15.5 million in the third quarter of last year. Operating income for the third quarter of last year was negatively impacted by 0.3 million restructuring charge relating to the New Iberia shutdown. Operating income for the third quarter this year was positively impacted by 0.5 million, as a result of the gain on sales of the New Iberia, Louisiana manufacturing facility. Interest expense increased 0.5 million to 11 million for the third quarter from 10.5 million in the third quarter of last year. Our average debt outstanding was 25 million higher in the third quarter fiscal 2006, as compared to the third quarter of last year.

I'd like to take a moment to discuss EBITDA and adjusted EBITDA. Non-GAAP financial measures that we have reconciled to net cash provided by operating activities in today's press release. Our EBITDA increased to 18.6 million for the third quarter, compared to 17.3 million in the third quarter of last year. Adjusted EBITDA for the third quarter of last year, which excludes fiscal 2005 restructuring costs, was 17.6 million. There were no adjustments to EBITDA for the 13-week period ended September 30, 2006.

Capital expenditures for the third quarter of fiscal 2006 were 1.8 million. We continue to foresee modest capital expenditure requirements for the foreseeable future. Moving on to the balance sheet, we finished the third quarter of 2006 with 20.9 million in cash, compared to 21.5 million in the second quarter of fiscal 2006 and 25.4 million at the end of fiscal 2005. This is in line with out plans for the year. We also finished the quarter with 430.8 million in long-term debt and 79.3 million in stockholder's equity.

Our inventory at the end of the third quarter of 2006 increased 1.8 million to 93.9 million compared to 92.1 million for the same period of fiscal 2005. The business remains healthy from a cash point of view. Planned capital spending is expected to remain consistent with fiscal 2005. Annual cash interest expense for fiscal 2006 is approximately 41 million. On October 30th, we made a cash payment of $0.4265 per EIS to holders erected as of September 30, 2006. As previously announced this reflects the cash dividend of $0.212 per share of Class A common stock and an interest payment of $0.2145 per $7.15 principle amount of senior subordinated notes.

I will now turn the call back over to Dave for his remarks.

Thanks, Bob. Once again we are very pleased with our quarterly performance, which we believe testifies to our ability to execute our growth and operating strategies in a tough cost environment. Net sales increased more than 10% and adjusted EBITDA increased nearly 6% in the quarter. And while we continue to be impacted by higher costs in several areas, we are managing through these hurdles.

The net sales increase of 10.3% over the third quarter of fiscal 2005 was made up of both acquisition driven growth and organic growth. Combined the Grandma's Molasses and Ortega cheese sauce acquisitions accounted for 5.7 million of the net sales increase. These brands are performing very well for us and are tracking ahead of net sales with their prior owners. As pleased as we are it is worth noting that Grandma's does about half of its net sales in the last four months of the calendar year, as part of the holiday baking season. So we expect strong net sales from this brand in Q4.

During the third quarter, we also saw $1.1 million net sales increase from a temporary co-packing arrangement with a manufacturer affected by Katrina. This arrangement is expected to taper off as we near the end of 2006 with very little volume expected in 2007. Our remaining sales growth came from the base business, about 3% organic growth. Some of that came from price increases, but to a lesser degree than in prior quarters. Even though our pricing benefits have slowed in this quarter, we continue to take pricing wherever possible to maintain momentum and offset future cost increases. To that end, we've recently announced price increases on a number of brands effective January 1, 2007.

Net sales increased for all but two our 17 brands in the third quarter, and we are very pleased to see strength demonstrated throughout the portfolio. Our B&M brand did particularly well increasing $800,000 or 19% due to an enhanced radio advertising program and more effective promotional programs. It's also worth highlighting our Maple Grove Farm's line, which was up 1.7 million reflecting very strong sales of pure maple syrup and sugar-free syrup.

Ortega continued to do well increasing 0.6 million due to in part, new product introductions and Los Palmas saw an ongoing benefit from the addition of Dollar Stores into that brands distribution network. New products are helping several of these brands including Ortega and Maple Grove. Our Ortega Grande Dinner Kit introduced in 2005 will contribute over $4 million in net sales this year. And our new Ortega Soft Tortilla's in distribution in the New York area, for our store door delivery system will contribute nearly 1 million.

Maple Grove sugar-free syrups are doing very well, with sales up 60% versus last year. About half of that growth is from the new butter flavor item that we have added to the line this year. Added distribution continues to help these brands as well. Our Dollar Store initiative under the Las Palmas label, which began in 2005 continues to provide some of that brands growth, in addition to expanded grocery distribution.

In this past quarter, there were only two brands that saw decreased sales. One was the Emeril brand which as we saw last quarter is still facing tough comparisons versus year ago, as a result of reduced net sales to mass merchants and warehouse clubs. That said, the new Emeril cooking stocks and dressings are doing very well, and we are re-launching several existing products where we think there's an opportunity to enhance their sales performance. We are also considering radio advertising, featuring Emeril for the brand. We continue to be optimistic about this brand's long-term future even though we are going through a rough patch right now.

The other brand that decreased in the third quarter was Polaner which was down as a result in changes in promotional activity. The decrease we saw in the quarter is actually a very good illustration of what's happening in some brands as cost increase, driving us to new promotional price points. In this case we switched the traditional back-to-school sale on 32 oz. preserves from a $0.99 price point to a two for $3.00 price point. That change cost us over 1 million in third quarter gross sales versus last year. But improved gross profit by over $250,000 for the same event.

As time goes by, we believe the retailers and consumers will adjust to the new price point and sales will recover. In any event the change was absolutely necessary because of the increased cost of glass, fruit and corn syrup. The remainder of the Polaner brand continues to grow again benefiting from excellent sales of sugar free products. The company's overall net sales performance remains especially gratifying for us because we have continued our paper performance initiative on trade spending.

Net sales comparisons on the base portfolio are improving, evidence that volume affect of paper performance is largely behind us. Meanwhile, we continue to see cost improvement. Trade spending for the third quarter was down 1.2% of gross sales and it is now down 1.5% of gross sales year-to-date. We are now moving to more surgical cuts in trade spending, examining promotional programs in detail and adjusting them brand by brand.

As time goes by we become more and more convinced that this has been and will continue to be the right course for the business. The combination of healthy net sales and reduced trade spending once again played a key role in combating the industries persistent high-cost environment. Even with improved trade spending our gross profit declined 1.4% of sales, while improving in the absolute by $1.8 million. As is mentioned in the 10Q, higher cost for glass, packaging, maple syrup and corn syrup were factors.

Distribution costs were actually flat as a percent of sales, reflecting a better comparison to fuel surcharge levels than a year ago and increased customer pickups of product. Customer's now pick up nearly 25% of our shipments from national warehouses, saving us the cost of delivery. That's an increase of about 15% of the rate over last year. The allowance they receive for doing this is a deduction from sales. The fact that these deductions are increasing as volume shifts to customer pick ups, only makes our progress in trade spending levels look that much better.

Our operating expenses were higher for the third quarter. Sales and marketing expenses were up 1.1 million, partly due to higher sales volume. The larger factor was an increase in the marketing spending as we reduce trade spending costs, we are judiciously increasing marketing, spending and advertising to consumers. Because we believe the money is better spent there for some of our brands.

G&A spending was down slightly, the result of lower cost of compliance with Sarbanes Oxley versus last year's start up cost. But that was offset to some degree by higher accruals for incentive payments to management. All of this contributed to an EBITDA of 18.6 million for the third quarter, a gain of 1 million or nearly 6% compared to adjusted EBITDA for the third quarter of fiscal 2005. Comparing to the third quarter of 2005 adjusted EBITDA sets aside the $300,000 charge we recorded in that quarter and is more representative of the improvement in the ongoing business.

As we look forward it is important, very important to put the cost challenges in perspective. I know everyone is delighted to see the price of oil decline, we are certainly happy to see that. But that decline does not eliminate industry cost issues. In the third quarter we lapped the high-fuel surcharges caused by Katrina. And surcharges today remain essentially the same as they were in the fourth quarter 2005 and in the first half of 2006. That means that distribution costs going forward should be neutral if the price of oil remains where it is today. Cost issues with sweeteners such as corn syrup however, will not be neutral.

Because of the demand for ethanol, corn syrup suppliers are pricing aggressively and have announced a 20% increase in spot prices for the fourth quarter. We expect increases of this magnitude on contracts for 2007. We also expect maple syrup costs to rise in 2007 because of currency. The Canadian dollar is roughly 10% higher when it was when we did most of our purchasing this year. Forecasts continued to call for a decline versus the U.S. dollar but the fact is that the Canadian dollar remains stubbornly high. We hope for improvement by now, but saw little or no relief on commodities such as bean from this year crops, while packaging costs continue to rise. Glass producers for instance are announcing price increases of up to 9%.

Now, I'm not preaching gloom and doom here, but I am pointing out that there is still cost pressure. Our suppliers are trying to recover their margins, just as we are. We expect that cost increases in 2007 will be roughly half of what they were in 2006, so the situation is getting somewhat better. As I mentioned earlier, we have already announced price increases on a wide number of our products effective January 1st, 2007. These price increases are intended to offset the cost increases we see coming in 2007.

In addition, we are working diligently to reduce costs wherever possible and some of these efforts should help offset increases in 2007 and possibly improve margins. Turning to our balance sheet, inventories were up 1.8 million versus third quarter of -- excuse me, 1.8 million year-over-year in the third quarter and we remain pleased with the progress we have made in reducing the year-to-year differential in finished good inventory since the first quarter 2006.

This has been a point of emphasis for us. The current inventory increase represents higher inventories from our acquisitions in the last 12 months and more complete, seasonal pack on the B&G brand. We expect to continue narrowing this year-to-year comparison over time. In the meantime, our cash position remains comfortable, representing well over four quarters of dividend payments at the quarterly dividend rate we've paid for the last eight quarters.

On the acquisition front both Grandma's and the Ortega Food Service dispensing pouch and dipping cup business have proven to be solid performers and we are quite happy to have them in our portfolio of brands. Consistent with our acquisition strategy we remain committed to carefully evaluating opportunities as we actively look for acquisitions that would fit our financial profile and complement our existing business.

We believe that the third quarter of fiscal 2006 results show that our growth and operating initiatives are working successfully. This was the second successive quarter of double digit net sales growth. And we've seen 8.5% year-to-date net sales growth. Year-to-date adjusted EBITDA is up 5% or $2.5 million. All of this is accomplished in the most challenging cost environment we've seen in over the past ten years.

Going forward we will continue to work to maintain and improve our margins by being aggressive on the pricing front, while hopefully growing out top and bottom lines. Our diverse portfolio is well positioned to continue to producing steady reliable results with recent acquisitions adding to the performance of our base business, as they have so far in fiscal 2006. That pattern should remain the same in the final quarter of our fiscal year. We look forward to reporting to you on our ongoing progress in the fourth quarter and beyond.

Just a final note, unrelated to our quarterly performance, the Canadian government announced late yesterday that they were changing the tax treatment of existing Canadian income trusts effective 2011 and of any new Canadian income trusts effective immediately. Just to clear up any misconceptions, this tax ruling does not affect us. We are not a Canadian income trust and our EIS structure is not governed by Canadian tax law. We are a U.S. company subject to the same U.S. corporate tax laws as any other U.S. corporation. As a result, we have no reason to anticipate any change in the tax treatments of our EIS's.

With that, I'd like to open the call up to questions. Operator?

Thank you.

[OPERATOR INSTRUCTIONS]

And we will go to Reza Vahabzadeh at Lehman Brothers.

Good afternoon.

Good afternoon, Reza.

Good afternoon, Reza.

The $2.7 million of organic revenue growth, was that primarily price mix or volume, or some combination?

Actually, significantly less than half of it was price. Pricing has, as I said, throttled back as the year has progressed. We are seeing about $600,000 a quarter in pricing benefit, the rest of it is volume growth.

Okay. And the slow down in pricing is attributed to any particular factors?

We're just rolling over versus the price increases we've taken. As trade goes down, it says we're certainly not spending it back against the customers, it's just it is a rollover phenomenon as you lap the price increases.

Okay. And any particular segments where the competitors have not followed through with the pricing that has given you some challenges?

Not so much as not followed as there are some that really haven't moved and a glaring one is Ortega which is obviously our largest brand. We have not seen General Mills take pricing there, so that has constrained us somewhat on taking our own price increases.

Got it. And then as far as packing costs, was that the primary input cost pressure in the quarter as far as excluding ingredient costs?

No, I would say that maple syrup is probably the biggest cost pressure and packaging is probably number two.

Okay. And so costs just excluding pricing, how much did cost affect your gross profit for the quarter, gross margin for the quarter? Whether it was packaging or ingredient costs.

Well the cost to manufacturing if you look at our cost of manufacturing is a percent of sales it is up several percent. It's up over 2%. We've offset that with the trade promotion savings and some other things that we've done. But, cost of manufacturing is up substantially.

Got it. Do you expect the rate of the cost increase to stay at the same level in the fourth quarter and then moderate? When do you think the cost pressures will moderate?

We start lapping ourselves in the fourth quarter. In fact, if we look at our cost of manufacturing nit he fourth quarter it is a very similar percent of sales to what we've seen in the first nine months of this year. So we definitely are going to lap ourselves in the fourth quarter.

And then as far as main environment, any comments, any color, what you are looking for and what's out there?

It's a little spotty, but there are things out there. What we are looking for is very similar to what we've done, preferably higher margin things that fit within our sales and distribution structure and give us synergies so we can end up paying a reasonable multiple.

And lastly, Emeril the re-launch, which product lines within Emeril did you re-launch.

Well, we've re-launched the dressings. We are in the process of reconfiguring the marinades to re-launch them. We'll probably change the packaging on the seasoning somewhat, although the seasonings, I guess it's more of an opportunity than it is an issue that we think we can do a better job on packaging the seasonings that we are doing today. Those are the ones we are working on right now.

Dave, do you know why the seasonings and the pasta sauces appear to have done better than the dressings, as best I can tell?

For, I can guess several reasons. When you look at the price points, I think we've positioned those price points better within the category than we did with the dressings. The dressings are up in the $3 plus on the initial launch and that's premium in the salad dressing category. The re-launch dressings are configured to be $1.99 on the shelf which is much more competitive with a much more obvious packaging. So I think we are trying to take the line more mainstream in the areas where we think we have too specialty and too high-priced.

Thank you, much.

[OPERATOR INSTRUCTIONS]

Next to Robert Moskow, Credit Suisse.

Good evening.

Good afternoon.

Hello.

Hi. I wanted to know, your operating income when I exclude the gain this year from the sale and then exclude the restructuring charge, I only see about a 2% increase. Can you tell me how much of that came from the acquisitions?

Well, the acquisitions are the majority of that. And what we've said all year long is we were able to -- we've been trying to keep our base business flat and our profits would go up this year based on the acquisitions. And that's pretty much what we've been able to do.

Okay, so your base business was pretty flat.

Yes.

We're holding our own against the cost increases right now, is one way to put it.

And how profitable was the co-packing sale, the 1.1 million in co-packing, is that very high margin or low margin or about average?

Very modestly profitable.

Very modest. Okay. The second thing was working capital seemed to increase about $3.5 million or was a use of funds. Can you tell me what went into that, was it just the inventory change or was it a little more?

Yes, this the quarter we peak out on our inventories, you're essentially done with the B&G seasonal pack, which drives inventory. You haven't depleted the maple syrup inventory as much the fourth quarter is the big manufacturing and sales quarter for maple syrup. So, those are the kinds of things and we had a much more complete B&G seasonal pack this year than we did last year. The produce situation was better. So, that's what peaks the inventory in this quarter and then as you go to the fourth quarter you start depleting it pretty significantly.

Okay. And then one thing I thought might be a positive next year or maybe its just less of a negative, is steel can price increases. You see in the headlines a lot about higher steel inventories and prospects of lower prices in steel and I know it's not a direct correlation, but you mentioned glass being up 9%, do you have any view on what to expect on tin plate prices and steel cans?

No, I really don't. We're hopeful that those kind of commodities drive cost decreases, but it really is an industry-by-industry thing and we we're not sure what to expect there.

Would it be unreasonable to think that things could be flat or even down. You're saying you hope that it would drive cost decreases.

It appears that it will be flat, but you know, that's as of today.

Okay.

And I know I hedge things on that kind of stuff a lot, but oil scares me. So, I caveat any forecast with oil stays where it is today.

Okay. And then lastly, when I looked at Q4 and you mentioned that Grandma's is a very seasonal Q4 business and then the very easy comparison to last years gross margin. How should I think about gross margin sequentially from Q3; you're at 28.8%, third quarter, is it about the same in the fourth? Or is it actually better in fourth or either of those two.

It will be about the same, you get the benefit from Grandma's but actually the mix of products we typically sell on our other business is a little lower margin in the fourth quarter versus the third quarter. So if you look at last year our margins actually came down just because of the mix of what we sell. Grandmas should offset that so it should be relatively flat year-over-year.

Right. Was there any benefit from acquisitions in Q4 of last year or did that all hit in 2006.

The only thing we had was one month of the Ortega cheese business and that's a very small profitable business.

Okay, thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS]

Gentlemen we are standing by with no further questions signaled at this time. I'd like to turn the conference back for any closing or additional comments you'd like to make.

Okay. Thank you all, very much. As I said before we're very pleased with the results this quarter. We think we are managing our way through the cost environment very well. We foresee the cost environment improving somewhat next year, in that the cost increases won't be as large as they were this year. And we think we've made accommodations for that between the price increases we are taking, and the cost savings projects that we are trying to generate to offset those increases. So, we are very hopeful for the fourth quarter and very hopeful for 2007. And again, thank you all very much.

This does conclude today's conference. We do thank you for your participation. You may disconnect at this time.